16 Jan 2020 Member Feedback
Regarding Senior Tax Counsel’s article on the CGT main resident exception
Editor’s note: Bob Deutsch’s recent article “Foreign residents – Watch that CGT main residence exemption!” can be found in TaxVine 48 (13 December 2019).
MEMBER 1 writes:
In relation to Bob Deutsch’s report in 13 Dec 2019 Tax Vine – let’s say that Elizabeth was going to the US instead of the UK, and she sold the Melbourne property 3 years after moving out of her Australian main residence. As she would have been in the US for a sufficient period to be taxed as a resident of the US (world-wide income and gains) the sale of the former main residence in Australia will also come under US tax rules. These state that on date of sale of a main residence you look back five years, and if the property was occupied as a main residence for at least a 2 year period within that last five years then you can claim a main residence exclusion for US tax purposes. If Elizabeth was unable to show that she had occupied the property as a main residence for the required two year period in the past five years then the capital gain exclusion would not be available to her and she would be subject to US capital gains tax on the entire gain.
The US Federal main residence exclusion is restricted to a $US250,000 for a single filer or $US500,000 for a married couple filing a joint US return. For these purposes cost is based on original cost and improvements expressed in USD as at the rate of exchange in effect on the date of purchase/paying for improvements, and not the value as at date of becoming a US resident for tax purposes. There are lots of other wrinkles of course – the State in the US that Elizabeth is living in may also tax the capital gain on the sale of the property in Melbourne. For US Federal tax purposes any tax paid in Australia on the sale would be available as a foreign tax credit in the US subject to US rules. If her income from all sources exceeded stated thresholds she could also incur an additional 3.8% US net investment income tax, which cannot be offset by a foreign tax credit. The US state that she resides in would not generally allow a credit for any Australian tax paid.
If all of this seems a bit unfair – it gets worse. Let’s say Barry and Elizabeth are dual US/Australian citizens who have lived in Australia since they bought the property in 1991. They don’t go to the UK or back to the US, and remain residents of Australia for tax purposes. They sell the Melbourne property and enjoy the tax free capital gain available on the sale of a main residence. If the gain on the sale of the residence turned out to be $US2.5m, they claim a $US500,000 exclusion, and they pay US capital gains tax at the rate of 23.8% (20% capital gains tax plus 3.8% net investment income tax) on the balance. A US tax bill of $US476,000 on the sale of a main residence in Australia by a resident of Australia for tax purposes.
So I am one of those who make the argument about the ceding of revenue to a foreign jurisdiction …
MEMBER 2 writes:
The following statement is incorrect in the Senior Tax Counsel’s Main Residence article:
"As Elizabeth owned the property as at the time of the announcement of the measures on 9 May 2017, she is unable to access the transitional rule which would have avoided the outcome outlined above."
The taxpayer would be able to access the transitional rule on these facts if she had sold pre-30 June 2020.
SENIOR COUNSEL response:
Thanks Member 2 for your comments.
In the context of the example I set up the statement is correct - I said she sold in 2021 so clearly the transitional rule is not available. I agree that for the sake of clarity it would have been preferable if I had repeated that she sold in 2021 in the sentence you have highlighted.
Reporting on ‘Regulator’s Tax’
MEMBER 3 writes:
I presume that the TI will commence reporting on the new tax regime that is being implemented in Australia.
It’s called the “Regulators’ Tax”. It is imposed by regulators on businesses both large and small.
The methodology is: find a business, accuse it of misbehaviour and impose an outrageous amount. How does a regulator decide what to charge and how to charge? Use the well-known ‘keeping up with the Jones’ method”.
If another regulator has levied the tax then you do the same at an even more outrageous number. Or, as I have seen with one regulator, if you cannot find a fault with a business then claim that they did not act politely and then you can charge them for the time for hearing the complaint that was dismissed.
In the case of Westpac, find 23 million instances, and then use publicity to falsely claim that there were 23 million cases of money laundering and then impose a possible fine of one billion dollars that flows on to industry super funds in the form of lower dividends which harms ordinary workers. Of course Commonwealth public servants are not harmed because they are members of an unfunded government pension…
Why does it have to be so hard?
MEMBER 4 writes:
Member 348 wrote in TaxVine 48 (13 December 2019) regarding the requirement to write to each taxpayer to get written authority.
I am a sole trader with two accountants and one administration person. We lodge 2,500 ITRs, thus we would need to send out letter / emails of some 2,500, then monitor responses, answer hundreds of phone calls, receive written authority and then process them. There is no way this is an effective solution, I will not do that. Thus we will leave it as it is. This undertaking of the ATO is useless.
I do note prior members at least have commented on this matter, Members 260, 267, 271 and 276, with Member 276 commenting - A practical solution – the postal address label of a tax return is re-labelled to ‘preferred address for service’, then the form allows a postal or email or MyGov nomination.
So, the annual ITR that a client signs has the communication preference, it becomes part of usual work function for us and ATO, no additional resources of TAGs being used. It’s time to seriously think about having a Simple election process on an ITR.
MEMBER 5 writes:
Thanks Bob for a wonderful year explaining, elucidating & simplifying numerous taxation developments and policy issues. You truly are the Lionel Messi of taxation issues and wish you & your family a prosperous and healthy 2020.
I totally agree with Member 348 comments and recommend his/her retirement in 2020, if possible? I also suggest the ATO revisit their IT operating systems and correct, update and facilitate the smooth processing of Deceased Estate TFN processing and Portal applications re no further returns are necessary in relation to Deceased Estate taxation returns. The current system is too cumbersome & time-consuming.
Extend the deadline please
MEMBER 6 writes:
As a tax agent, I strongly urge the Tax Institute to lobby the ATO to extend the deadline for the removal of AusKey.
A lot of my small business clients are still grappling with implementing Single Touch Payroll. The ATO needs to understand that for many small businesses, changes to digital systems are both time consuming and difficult to implement. Accordingly the 31 March 2020 deadline is unrealistic.
It concerns me that many of my small business clients are overwhelmed by the imposition of continual digital changes that have unrealistic time frames.
Hold on! As I write this submission to Taxvine, I have received the ATO’s first email newsletter for 2020. The newsletter refers to the devastating bush fires and states that the ATO are here to help tax agents and their clients. The newsletter goes on to say that the ATO is still proceeding with the replacement to Auskey from late March.
It appears that the ATO is fixated on achieving their deadline irrespective of what is happening at small business level and within the wider community.
Franking Credit Refunds
MEMBER 7 writes:
Prior to the Christmas shut down of ATO systems I downloaded prefilling reports for clients that I have not yet prepared their 2019 tax returns. I have 8 clients who I submit the Franking Credit Refund returns and 7 of those clients had a status of "Lodgements and Payments up to date".
Upon further investigation, each of the 7 clients had the lodgement status of "Return not necessary". I contacted 2 of the clients and asked if they had contacted the ATO to notify that the return was not necessary. They both answered that they had not rang the ATO and wanted me to prepare their franking credit refund tax return.
Have any other agents had this situation happen to their clients? The cynic in me is thinking that perhaps the Labor Party policy has infiltrated the ATO and they wish to stop the refund of excess franking credits
Whistleblower Protection and tax agent’s obligations
MEMBER 8 writes:
I read with interest your brief on new Whistleblower Protection laws and wonder if our obligation as a tax agent has changed in any way, especially with regards to client confidentiality.
I remember attending a recent seminar hosted by Legalwise where, upon being asked a question, a senior ATO officer suggested to the SMSF auditor to use tip off hotline and blow the whistle. This was when the client had withdrawn the engagement with the auditor because of difference of opinion. I wondered if the auditor wouldn’t be bound by client confidentiality, having received confidential information as part of a prospective engagement.
While we as tax agents often decline an engagement when we feel the prospective client doesn’t stack up, I hope the ATO doesn’t expect us to now pick up the phone and call tip-off hotline?
Tax agent appointment ceasing upon death?
MEMBER 9 writes:
I have now reviewed the provisions of Subdivision 355-B of the Taxation Administration Act as much as possible.
Where does legislation provide that the appointment of a tax agent in relation to an individual taxpayer ceases on death?
Where an agent was lawfully appointed as the agent of a deceased individual, there is no apparent reason (other than if the legislation provides) why that appointment ceases on death. The taxation affairs of an individual continue after death as we know, and it is reasonable to conclude the deceased individual intended the appointment to continue until such time as the LPR determines otherwise.
‘Disturbing’ compulsory HELP debt repayment practices
MEMBER 10 writes:
I have come across a disturbing practice by the ATO of late with respect to Compulsory HELP debt repayments.
I have had clients who, in the last couple of years, have enrolled in tertiary courses and taken up the deferred HELP debt option to cover their fees. These clients have had up to 6 years of tax returns outstanding.
When we have lodged the outstanding tax returns the ATO have assessed compulsory HELP debt repayments (where their income exceeds the threshold) for years prior to them incurring the HELP debt. There seems to be no information available explaining this approach and it is difficult to explain to clients why they should pay a debt in a period before the debt exists.
Can anyone advise what basis this approach has in law or regulation? It’s pretty cruel to punish someone for returning to study to better themselves at the time when they are sacrificing their income earning ability to do so.
Give our mental health a break
Member 11 writes:
I have been extremely disillusioned with the tax profession lately.
Weekly news feeds continually bombard us with negativity of our profession and constant attacks on numerous issues that the ATO is targeting. There appears to be no real thought to these attacks other than to scare and threaten tax agents and taxpayers.
In the past (some years now) I have been proud to work with the ATO on various committees and projects and found common ground in making the system fairer, easier and more efficient. My views were respected, and I would always feel like I may have contributed to the greater good of our industry.
In the last few years there has been a significant shift in this thinking from the ATO. We lost phone call access at one point, BAS forms automatically reverted to electronic delivery if amended by agents and old addresses appearing when entering the PAYGI system. Notice of assessments then went directly to taxpayers via MyGov without any care of the carefully designed systems us agents have developed to be accountable to our clients. Despite complaints from us, the ATO appeared to steamroll ahead with a total disregard to the practical issues faced by tax practitioners.
The attacks have unfortunately continued. Deceased estates and the issues faced with the new tax agent portal is just crazy. Now the ATO expect us to use manual paper lodgements. Hold on, I thought you insisted on all electronic protocols being the new age and all? It appears that you just make up the rules with what suits you. How does a Government organisation just change a system knowing there are serious unaddressed issues? The effect is more lost time by agents who are trying their best to make the system work.
The final attack has come out with the ATO now implying that tax agent prepared returns are mainly wrong. Unbelievable. You are destroying the industry. I know of many accountants who have hit the wall and sold out before they had a mental breakdown. I know of many accountants who don’t want to be partner because it is too stressful and just not worth the money.
So in light of the very serious issue of mental health these days, why does the ATO insist on slamming our industry and the good people who make it work. Do you know that accountants are one of the most trusted professions out there? Why do you think that is the case? It’s not because we all are overclaiming deductions for our clients. It’s because we are always striving to do the right thing in a very complex and everchanging industry.
The first sign that perhaps the industry has had enough filtered through last week. Thank you to the Institute of Public Accountants and Andrew Conway – you get what is happening in our industry. I would like to share the quote to those who also may feel unappreciated: “Fundamentally, we’re asking for the ATO to show respect to the role the tax agent has. [The ATO] has every right to regulate, every right to prosecute and hold people accountable, but they have to do it in a respectful way.” The reality is, as Assistant Treasurer Michael Sukkar has pointed out, when you take tax agents out of the tax system, the tax system in Australia falls over.
So what we are encouraging is for the ATO to genuinely show respect to the role that the tax agent plays.
Disney merger ruling
MEMBER 12 writes:
Is there a ruling in the pipeline re the 21st Century Disney merger? I elected to roll over into stock and expect CGT relief. Is there a ruling specifically on this matter?
New login system
MEMBER 13 writes:
One needs to ask the question as to whom is supposed to be supporting the new log in system to the ATO for the tax agent online services.
Had the need last week to install 3 of these for a client last Friday. It took nearly 2 hours and then I decided to show the client how I could get into the new online services for tax agents to find a solution to a query given to me by the client.
Immediately had a problem and the new login system did not work on my mobile phone. Called the help desk and ended up in Burnie Tasmania where the staff are outside contractors and the girl after wasting another 30 odd minutes told me she did not know how to fix the problem.
I was advised that some person from level 2 support would call me back in around 2 days. Here we are days later and I call again and seek some assistance. I again get told that they cannot assist and then get put onto a supervisor, again I am told that perhaps I have not installed the application correctly but there is no person to speak to, now I am told that I have to wait for at least a week to receive support.
Well this new system will be just great when everyone is attempting to get into the online service, and when we need support we are then going to be dead and unable to get into the online services.
If the ATO are insisting on using external contractors, then please ATO make sure you get a company that has sufficient qualified staff and that they can assist practitioners.
Just imagine many thousands of tax agents waiting over a week to get access to this online services, when we are prohibited from logging intro the ATO to get reports.
Really bad and not acceptable to the fullest
ATO lift your game and provide some decent service to the tax community.
Portal for our deceased clients disconnected
MEMBER 14 writes:
The ATO has again disconnected our portal access for our deceased clients. Dear Commissioner, do you want the tax return prepared till the date of death? Unless we get access to the portal, you will not get one. And remember the taxpayer is dead so you are unable to harass them for their last return and you cannot threaten them with gaol or public ridicule.
The family turn at this very emotional time to us, the tax agents, to get the affairs of the deceased in order. You have a responsibility to administer the tax system so stop making it difficult for people to comply.
Regarding member 351’s comments ‘Deregistered private company’
Thanks Member 351 for your comments. A company’s taxation and superannuation obligations should be finalised prior to a company deregistering with ASIC. Under the Corporations Act, once a company is deregistered with ASIC the entity ceases to exist, and there is no person authorised to act on its behalf.
As a result, when a company becomes deregistered the ATO is generally unable to:
Given the registration status of the entity, there is no longer a legal entity capable of lodging an income tax return or authorising a representative to do so on its behalf, and the Commissioner cannot legally raise an assessment.
In short, once de-registered, the company simply does not exist.